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Trickle-Down Economics and Broken Promises

Trickle-Down Economics and Broken Promises

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Three new CAP reports debunk the myth that top income tax breaks and other policies that benefit the wealthy generate broadly shared economic prosperity.
Three new CAP reports debunk the myth that top income tax breaks and other policies that benefit the wealthy generate broadly shared economic prosperity.

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Published by: Center for American Progress on Dec 04, 2013
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12/27/2013

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1 Center for American Progress |  Trickle-Down Economics and Broken Promises
 Trickle-Down Economics and Broken Promises
How Inequality Is Holding Back Our Economy
By Ben Olinsky and Asher Mayerson December 4, 2013
For more han 30 years, conservaive poliicians have ried o sell Americans on he noion ha giving ax cus o he wealhy will spur economic growh and job creaion, generaing broad-based economic prosperiy. Teir markeing o his “rickle-down economics” has been successul: Afer decades o campaigning, many Americans now accep he of-repeaed asserion ha lower axes and less regulaion leads o job growh. Congress ollowed sui, lowering ax raes sharply or he highes-income earners, while leaving ax raes relaively unchanged or oher groups. When Presiden Ronald Reagan ook office in 1981, he marginal ax rae or he highes income bracke was 70 percen,  bu ha ell o jus 28 percen by he ime he lef office.
1
Even afer modes increases since hen, he op marginal ax rae or op earners oday hovers a jus more han hal o wha i was in 1980 (see figure 1). A he same ime, Congress and he cours have aken repeaed seps o roll back labor and financial regulaion, urher conribuing o he skyrockeing  wealh o he op 1 percen.  Ye empirical economic daa show ha hese mis-guided policies did no deliver on heir promises, as our naion’s economy afer he ax increases o 1993 significanly ouperormed he periods afer ax cus in he 1980s and 2000s. Invesmen growh, pro-duciviy growh, employmen growh, middle-class income growh, naional fiscal healh, and overall economic growh were weaker or declined under rickle-down policies.
2
Far rom generaing broad prosperiy, hese mis-guided policies have also led o an unprecedened level o income inequaliy in he Unied Saes. Conservaives have alernaely denied a rise in
FIGURE 1
Top marginal tax rate
Source: Tax Policy Center, “Tax Facts: Historical Individual Income Tax Parameters,” available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=543 (last accessed October 2013).
 
100%80%60%40%20%1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013
    T   a   x   r   a    t   e
Tax year
 
2 Center for American Progress |  Trickle-Down Economics and Broken Promises
FIGURE 2
Gini index for U.S. households
Source: U.S. Census Bureau, “Table H-4: Gini Ratios for Households, by Race and Hispanic Origin of Householder,” available at http://www.census.gov/hhes/www/income/data/historical/inequality/ (last accessed October 2013).
 
0.50.450.40.351967 1972 1977 1982 1987 1992 1997 2002 2007 2012
    G    i   n    i   r   a    t    i   o
Year
FIGURE 3
Average annual growth in real gross domestic product, by top marginal tax rate, 1950-2010
Source: Bureau of Economic Analysis and Tax Policy Center.
28313538.6Top marginal income tax rate 39.6506975758090+0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Average real GDP growth
inequaliy ourigh or insised on is necessiy or opimal growh. In 2012, or example, conservaive columnis and poliical commenaor Michael anner wroe ha “inequal-iy may no be growing a all.
3
 Economis Diana Furchgot-Roh goes even urher in wriing abou he “myh o increasing income inequaliy,” concluding ha “inequaliy has declined raher han increased.”
4
 Bu a preponderance o economic research󲀔and he real-world experi-ences o millions o Americans who winess rising inequaliy firshand󲀔show his o be unrue. Te Gini index, economiss’ well-esed measure o inequaliy and one he U.S. Census Bureau offi-cially calculaed, shows ha he Unied Saes has seen a seady rise in income inequaliy since 1980 (see figure 2).
5
Oher conservaives acknowledge ha inequal-iy may be rising bu claim ha i is a posiive developmen ha provides Americans wih srong incenives o work hard and innovae. Tis is wha led Richard Epsein, a senior ellow a he Hoover Insiuion, o pen he column “In Praise o Income Inequaliy,” in which he akes aim a “increased regulaion and axaion” as holding back equiable growh.
6
 According o rickle-down heory, cuting he op marginal ax rae should generae he larger incenives needed or sronger economic growh, even i doing so also drives up inequaliy. Bu in realiy, our naion saw is highes growh raes no  when he op marginal ax rae was 28 percen, bu when i was 75 percen o 80 percen (see figure 3).O course, his comparison does no ake ino accoun remendous srucural differences in he economy over hese periods, and here has been a long and robus debae among economiss on he effecs o inequaliy on economic growh󲀔daing  back o Adam Smihs acknowledgemen o boh he coss and benefis o inequaliy. Yale Universiy economis Arhur Okun se he conours o he modern debae wih his 1975 book,
 Equality and  Efficiency: Te Big radeoff 
 , which argued ha greaer income inequaliy offers more rewards or  work and invesmen, and hence income inequaliy and economic efficiency are in ension.
7
 
 
3 Center for American Progress |  Trickle-Down Economics and Broken Promises
Empirical research since hen has been mixed, bu much o i conflics wih Okuns hypohesis and suggess ha inequaliy hurs long-erm economic growh. A 1996 effor by economis Roland Benabou o summarize he research ound ha 11 o he 23 sudies surveyed showed ha inequaliy srongly negaively impaced growh, while he remaining 12 sudies showed a negaive bu quesionably significan impac or no effec a all.
8
 Sill, some economiss such as Rober Barro have pu orward a more nuanced  view in which he impac o inequaliy on growh may no be a simple linear relaion-ship; or example, i may be bad or growh in poor counries and good or growh in rich counries.
9
 Ohers have inerpreed Barros resuls o indicae ha higher inequaliy may increase growh in he shor run bu hur i in he long run.
10
 Sudies looking a he relaionship beween inequaliy and growh only in he Unied Saes have ypically ound eiher a clear negaive relaionship or a posiive relaionship in he shor run and a negaive one in he long run.
11
 While he shor-erm relaionship may be more in ques-ion, here is evidence ha in he long run, inequaliy can hold back an economy.Tree new papers commissioned by he Cener or American Progress shed resh ligh on his debae, offering convincing evidence ha higher inequaliy does no in ac lead o growh and may acually hold back our economy: David Howell, a proessor o economics and public policy a Te New School, deails our counrys growing income inequaliy since 1980 and conrass wo broad  visions: a “laissez-aire” sory in which high and rising inequaliy invariably promoes economic perormance; and a “poliical economy” vision in which rising inequal-iy󲀔over a cerain modes hreshold󲀔harms growh and middle-class welare. In comparisons o he Unied Saes wih oher high-income counries, he shows ha  America’s exreme inequaliy o he pas hree decades has no produced excepional growh perormance; ha across counries, higher inequaliy has i anyhing been associaed wih slower growh; and ha he Unied Saes has he wors record in he rich world or sharing is produciviy growh wih nonsupervisory workers.  Jared Bernsein, a senior ellow a he Cener on Budge and Policy Prioriies, develops human capial and poliical economy models ha demonsrae he possible mecha-nisms hrough which income inequaliy can slow down growh raes. Adriana Kugler, a proessor o public policy a Georgeown Universiy, analyzes how economic policy and social services can conribue o a healhy labor marke. She demonsraes ha hese policies ha are designed o figh inequaliy also lead o a more producive use o human capial, which we know rom previous research lead us o a sronger economy.

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